Glob­al­iza­tion and its dis­con­nect

While seem­ingly ele­gant in the­ory, glob­al­iza­tion suf­fers in prac­tice. That is the les­son of Brexit and of the rise of Don­ald Trump in theUnited States.

Truth be known, there is no rig­or­ous the­ory of glob­al­iza­tion. The best that econ­o­mists can of­fer is David Ri­cardo’s early 19th cen­tury frame­work: if a coun­try sim­ply pro­duces in ac­cor­dance with its com­par­a­tive ad­van­tage (in terms of re­source en­dow­ments and work­ers’ skills), presto, it will gain through in­creased cross-bor­der trade.

Trade lib­er­al­iza­tion— the elixir of glob­al­iza­tion— prom­ises ben­e­fits for all. That prom­ise ar­guably holds in the long run, but a far tougher re­al­ity check in­vari­ably oc­curs in the short term. Brexit is just the lat­est case in point.

Vot­ers in Bri­tain ob­jected to sev­eral of the key premises of Euro­pean in­te­gra­tion: free la­bor mo­bil­ity and seem­ingly open-ended im­mi­gra­tion, reg­u­la­tion by supra­na­tional Euro­peanUnion au­thor­i­ties, and cur­rency union (which has se­ri­ous flaws, such as the lack of a fis­cal trans­fer mech­a­nism among mem­ber states). Eco­nomic in­te­gra­tion and glob­al­iza­tion are not ex­actly the same thing, but they rest on the same Ri­car­dian prin­ci­ples of trade lib­er­al­iza­tion— prin­ci­ples that are fall­ing on deaf ears in the po­lit­i­cal arena.

In short, glob­al­iza­tion has lost its po­lit­i­cal sup­port— un­sur­pris­ing in a world that bears lit­tle re­sem­blance to Ri­cardo’s two cen­turies ago— and there­fore Ri­car­dian prin­ci­ples seem ir­rel­e­vant to­day. Paul Samuel­son, who led the way in trans­lat­ing Ri­car­dian foundations into mod­ern eco­nom­ics, reached a sim­i­lar conclusion late in his life, when he pointed out how a low-wage tech­nol­ogy im­i­ta­tor like China could turn the the­ory of com­par­a­tive ad­van­tage in­side out.

But it is not just a prob­lem with an an­ti­quated the­ory. Re­cent trends in global trade are also flash­ing warn­ing signs. Ac­cord­ing to the In­ter­na­tion­alMone­tary Fund, an­nual growth in world trade vol­ume has av­er­aged just 3 per­cent over the 2009-16 pe­riod— half of that from 1980 to 2008. With world trade shift­ing to a de­cid­edly lower tra­jec­tory, po­lit­i­cal re­sis­tance to glob­al­iza­tion has only in­ten­si­fied.

Glob­al­iza­tion has run into trou­ble even be­fore. Glob­al­iza­tion 1.0— the surge in global trade and in­ter­na­tional cap­i­tal flows in the late 19th and early 20th cen­turies— met its demise be­tween WorldWar I and the Great De­pres­sion. Global trade fell by some 60 per­cent from 1929 to 1932, as ma­jor economies turned in­ward and em­braced pro­tec­tion­ist trade poli­cies, such as theUS’ in­fa­mous Smoot-Haw­ley Tar­iff Act of 1930.

But the stakes may be greater if to­day’s more pow­er­ful glob­al­iza­tion were to meet a sim­i­lar fate, be­cause the scope of Glob­al­iza­tion 2.0 is far broader, in­clud­ing grow­ing trade in many so-called in­tan­gi­bles— once non-trad­able ser­vices.

The sharpest con­trast be­tween the twowaves of glob­al­iza­tion is in the speed of tech­nol­ogy ab­sorp­tion and dis­rup­tion. It took only five years for 50 mil­lionUS house­holds to be­gin surf­ing the in­ter­net, whereas it took 38 years for a sim­i­lar num­ber to gain ac­cess to ra­dios.

Sadly, the eco­nom­ics pro­fes­sion has failed to grasp the in­her­ent prob­lems with glob­al­iza­tion. In fix­at­ing on an an­ti­quated the­ory, they have all but ig­nored the here and now of a mount­ing worker back­lash. Yet the breadth and speed of Glob­al­iza­tion 2.0 de­mand new ap­proaches to cush­ion the blows of this dis­rup­tion.

Un­for­tu­nately, safety-net pro­grams to help trade-dis­placed or trade-pres­sured work­ers are just as ob­so­lete as the­o­ries of com­par­a­tive ad­van­tage. The US’ Trade Ad­just­ment As­sis­tance pro­gram, for ex­am­ple, was en­acted in 1962 for the man­u­fac­tur­ing-based econ­omy of yes­ter­year, and a Peter­son In­sti­tute re­port says only 2 mil­lion work­ers have ben­e­fited from it since 1974.

The de­sign of more en­light­ened poli­cies must ac­count for the pow­er­ful pres­sures now bear­ing down on a much broader ar­ray of work­ers. The hy­per-speed of Glob­al­iza­tion 2.0 sug­gests the need for quicker trig­gers and wider cov­er­age for worker re­train­ing, re­lo­ca­tion al­lowances, job-search as­sis­tance, wage in­sur­ance for older work­ers and longer-du­ra­tion unem­ploy­ment ben­e­fits.

As his­tory cau­tions, the al­ter­na­tive— whether it is Brexit or the US’ newiso­la­tion­ism— is an ac­ci­dent wait­ing to hap­pen. It is up to those of us who de­fend free trade and glob­al­iza­tion to pre­vent that, by of­fer­ing con­crete so­lu­tions that ad­dress the very real prob­lems that now af­flict so many work­ers. The au­thor, a fac­ulty mem­ber at Yale Univer­sity and for­mer chair­man ofMor­gan Stan­ley Asia, is the au­thor of Un­bal­anced: The Code­pen­dency of Amer­ica and China Project Syn­di­cate